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Don’t Buy Into Nike Stock’s Earnings Dip

Nike (NYSE:NKE) ended up getting some odd press coverage on Monday. Early in the trading session, news broke that celebrity lawyer Michael Avenatti was planning major legal action against Nike. Avenatti said that he would “disclose a major high school/college basketball scandal perpetrated by Nike”. Nike stock immediately dropped 2% on the news.

An hour later, the federal government arrested Avenatti for running an alleged $20 million extortion scheme against Nike. Sometimes, the truth is indeed stranger than fiction. NKE stock quickly recovered its losses. As fun as that media circus has been to watch, however, don’t get distracted from the bigger investment story with Nike stock.

That bigger issue is Nike’s latest earnings report. After a series of strong quarterly numbers, Nike came up short with its latest release last week, primarily due to soft sales in North America. On top of that, Nike issued soft guidance for the next quarter as well. However, it’s not all bad news for Nike stock.

NKE Earnings: A Mixed Bag

For the latest quarter, Nike’s North American sales rose 7% to $3.81 billion. Analysts had predicted $60 million more than that figure in revenues. Observers have offered various explanations for the shortfall. These range from a weak retail climate in general, the timing of new product launches, and the high-profile injury to college basketball superstar Zion Williamson when his Nike shoe ruptured during a game. In any case, Nike had been delivering dependable growth in North American sales recently, so this shortfall came as a surprise.

On the other hand, overall, Nike managed to hit its revenue expectations, as overseas sales came in strong. Additionally, the company managed to raise its gross margins by a healthy 120 basis points. On top of that, the company’s digital initiatives continue to drive both strong sales growth and higher average order sizes.

That enthusiasm was lost, however, when looking to forward guidance. There, Nike sees just 1% revenue growth this quarter. That figure should be a lot higher, but the company is getting pounded due to the strong dollar. Due to currency conversion, the company expects to lose 6% of its revenues due to foreign exchange. With the U.S. Dollar near multi-year highs, it is becoming a real problem for true multinational firms like Nike.

Nike Stock: Still Expensive

It can be tempting to look at Nike stock down more than 5% from its recent highs and think that this a great opportunity to buy the dip. However, it’s important to keep in mind that the recent high was in fact an all-time high. NKE stock had been screaming higher in recent quarters before this latest earnings reversal.

As recently as late 2017, you could buy NKE stock around $50 per share. Shares are still 60% above where they traded a year and a half ago. That’s a rather steep incline for a company that is growing revenues in the 7% or so range annually, even giving them credit for the currency conversion issues that temporarily depress that figure even further. Nike stock is trading over 30x trailing earnings and 27x forward earnings.

A Nike stock bull can reply, with good reason, that rivals Under Armour (NYSE:UA, NYSE:UAA) and Adidas (OTCMKTS:ADDYY) are also really expensive on earnings. That said, if investors lower valuations across the sector, Nike stock will get hit with the rest of the athletic gear makers.

Nike Stock Verdict

I’m not excited to buy NKE stock. Sure, it could go higher this year, especially if the broader market cooperates. But there are plenty of issues that could trip Nike up. For one, the Chinese economy is continuing to show serious strain. For now, Nike has managed to top expectations with Chinese sales, but look out for earnings misses out of that region if China can’t get their economy going again soon. Right now, the market is optimistic on U.S.-China trade relations, but more negative headlines could throw Nike stock for a loop.

On top of that, Nike has to demonstrate that the weakness in its domestic market was a one-off rather than a new trend. With currency conversions hitting Nike’s foreign revenues so heavily, dollar earnings are at a premium.

Nike has a great management team, and they could certainly overcome these obstacles. But at more than 27x forward earnings, you are paying a high price to get into Nike stock here in the face of these headwinds. The long-term growth story is certainly still working, but you’ll probably have a chance to buy into the stock at a better price later this year.

At the time of this writing, Ian Bezek did not hold a position in any of the aforementioned securities. You can reach him on Twitter at @irbezek.